U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the transition period from _______ to _______
Commission file number 0-23505
INNOVACOM, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 88-0308568
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3400 Garrett Drive
Santa Clara, CA 94054
(Address of principal executive offices) (Zip Code)
(408) 727-2447
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Number of shares of common stock outstanding as of May 14, 1999 was 25,035,796
Transitional Small Business disclosure format
Yes [ ] No [X]
<PAGE>2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INNOVACOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
(Unaudited)
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March 31,
1999
---------
ASSETS
--------
CURRENT ASSETS
Cash $ 69
Accounts receivable - trade, net of allowance for doubtful
accounts of $34 18
Inventory 136
Prepaid expenses and other 91
---------
Total current assets 314
Property and equipment, net 271
Deposits 37
---------
TOTAL ASSETS $ 622
=========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Note payable - related parties $ 120
Demand note 600
Convertible debentures 9,540
Accounts payable 1,466
Accrued liabilities 1,653
Liabilities in excess of assets of discontinued operations 63
---------
Total current liabilities 13,442
---------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.001 par value, 50,000 shares authorized,
25,036 shares issued and outstanding 25
Warrants 1,348
Additional paid-in capital 23,179
Deficit accumulated during development stage (37,372)
----------
Total stockholders' equity (deficit) (12,820)
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 622
==========
See accompanying notes to these condensed consolidated financial statements.
</TABLE>
<PAGE>3
INNOVACOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
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MARCH 3, 1993
THREE MONTHS ENDED (INCEPTION) TO
MARCH 31, MARCH 31,
1998 1999 1999
---- ---- ----
REVENUES $ 45 $ 36 $ 293
---------- ---------- ----------
COSTS AND EXPENSES
Cost of goods sold 22 167 558
Research and development 1,423 369 10,636
Selling, general and administrative 2,015 607 16,445
Impairment loss on property and equipment - - 937
---------- ---------- ----------
Total costs and expenses 3,460 1,143 28,576
---------- ---------- ----------
OPERATING LOSS (3,415) (1,107) (28,283)
---------- ---------- ----------
OTHER INCOME AND EXPENSE
Interest expense, net of interest income 976 659 6,627
Debt conversion expense - - 261
---------- ---------- ----------
Total other expense 976 659 6,888
---------- ---------- ----------
Loss from continuing operations before income tax
expense, discontinued operations, and extraordinary item (4,391) (1,766) (35,171)
Income tax expense 2 2 8
---------- ---------- ----------
Loss from continuing operations (4,393) (1,768) (35,179)
---------- ---------- ----------
Loss on disposal of discontinued operation 1,155 - 1,155
Loss from operations of discontinued operation, net
of income tax expense 224 - 1,161
---------- ---------- -----------
Loss from discontinued operations 1,379 - 2,316
---------- ---------- -----------
Net loss before extraordinary item (5,772) (1,768) (37,495)
---------- ---------- -----------
Extraordinary item: Gain on extinguishment of liabilities,
net of income tax expense - 123 123
---------- ---------- ----------
Net Loss $ (5,772) $ (1,645) $ (37,372)
========== ========== ==========
Basic and diluted net loss per common share
Continuing operations $(0.21) $ (0.07)
Discontinued operations (0.07) -
Extraordinary item - -
--------- ----------
Basic and diluted net loss per common share $ (0.28) $ (0.07)
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 20,562 25,036
========== ==========
See accompanying notes to these condensed consolidated financial statements.
</TABLE>
<PAGE>4
INNOVACOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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MARCH 3, 1993
THREE MONTHS ENDED (INCEPTION) TO
MARCH 31, MARCH 31,
1998 1999 1999
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations $ (4,393) $ (1,768) $ (35,179)
Adjustments to reconcile net loss from continuing
operations to net cash used in operating activities:
Depreciation and amortization 129 38 766
Amortization of discount on long-term debt 770 - 2,346
Gain on extinguishment of liabilities - 123 123
Impairment loss on property and equipment - - 937
Interest related to beneficial conversion features
of notes payable and long-term liabilities 25 285 2,583
Compensation recognized upon issuance of stock
and stock options 210 11 5,781
Expense recognized upon issuance of stock for
conversion incentive - - 261
Stock canceled in default judgments - (250)
Contribution of product license - - 1,275
Purchased incomplete research and development - - 500
Write-off acquisition costs 68 - 68
Write-off related party receivable - - 140
Changes in operating assets and liabilities:
Accounts receivable (36) (9) (18)
Prepaid and other expenses 76 (11) (91)
Inventory - (136) (136)
Due from related parties (36) - -
Deposits (3) - (37)
Accounts payable 637 (255) 1,877
Accrued liabilities 235 387 2,239
---------- ---------- ----------
Net cash used in operating activities from continuing
operations (2,318) (1,335) (16,815)
---------- ---------- ----------
Net loss from discontinued operations (1,379) - (2,316)
Loss from disposal of assets 41 - 49
Write down of film rights and film cost inventory 278 - 250
Write down of goodwill 848 - 848
Change in liabilities in excess of assets of discontinued
operations 1 - 63
---------- ---------- ----------
Net cash used in operating activities from discontinued
operations (211) - (1,106)
---------- ---------- ----------
(continued)
</TABLE>
<PAGE>5
INNOVACOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
(continued)
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MARCH 3, 1993
THREE MONTHS ENDED (INCEPTION) TO
MARCH 31, MARCH 31,
1998 1999 1999
---- ---- ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received in acquisition of Sierra Vista - - 2,917
Advance to related party - - (140)
Cost incurred for organization of joint venture - - (68)
Purchases of property and equipment (824) (5) (2,196)
Proceeds from sale of asset - - 4
---------- -------- ----------
Net cash provided by (used in) investing activities (824) (5) 517
---------- -------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock - - 2,898
Proceeds from notes payable - 600 5,465
Net proceeds from sale of debenture with detachable
warrants - 750 9,359
Principal payments on notes payable - (15) (289)
Settlement proceeds from stock litigation - 40 40
---------- -------- ----------
Net cash provided by financing activities - 1,375 17,473
---------- -------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (3,353) 35 69
CASH AND CASH EQUIVALENTS, beginning of period 4,148 34 -
---------- -------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 795 $ 69 $ 69
========== ======== ==========
See accompanying notes to these condensed consolidated financial statements.
</TABLE>
<PAGE>6
INNOVACOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements
March 31, 1999
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the fiscal year ended December 31, 1998.
In the opinion of management, the unaudited condensed consolidated financial
statements contain all adjustments considered necessary to present fairly the
Company's financial position at March 31, 1999, results of operations for the
three months ended March 31, 1998 and 1999, and the period from inception (March
3, 1993) to March 31, 1999, and the cash flows for the three months ended March
31, 1998 and 1999, and the period from inception (March 3, 1993) to March 31,
1999. The results for the period ended March 31, 1999, are not necessarily
indicative of the results to be expected for the entire fiscal year ending
December 31, 1999.
Note 2 - Discontinued Operation
On June 15, 1998 (measurement date), the Company's Board of Directors decided to
discontinue the operations of Sierra Vista Entertainment, Inc. ("Sierra Vista"),
its wholly-owned subsidiary and entertainment segment of the business.
Accordingly, Sierra Vista is accounted for as a discontinued operation in the
accompanying condensed consolidated financial statements.
The liabilities of Sierra Vista included in the accompanying consolidated
balance sheet as of March 31, 1999, consisted of accounts payable and accrued
expenses of approximately $63,000.
Sierra Vista has never generated any revenues.
Note 3 - Subsequent Events
To provide for additional working capital, on April 9, 1999, the Company
borrowed $600,000 from an investor who had previously purchased $4,750,000 face
value of Convertible Debentures, and had loaned the Company $600,000 on a demand
note. The April 9, 1999 note bears interest at 13% and is due on demand. This
same investor loaned the Company an additional $450,000 on terms similar to
those of the April 9, 1999 note on May 7, 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
With the exception of historical facts stated herein, the matters discussed in
this report are "forward looking" statements that involve risks and
uncertainties that could cause actual results to differ materially from
projected results. Such "forward looking" statements include, but are not
<PAGE>7
necessarily limited to, statements regarding anticipated levels of future
revenues and earnings from operations of the Company. Factors that could cause
actual results to differ materially include, in addition to other factors
identified in this report, lack of revenues, substantial losses, need for
additional capital and limited operating history, and other risks factors
detailed in the Company's Securities and Exchange Commission ("SEC") filings
including the factors set forth in the "Certain Consideration" section in the
Company's Form 10-KSB for the year ended December 31, 1998. Readers of this
report are cautioned not to put undue reliance on "forward looking" statements
which are, by their nature, uncertain as reliable indicators of future
performance. The Company disclaims any intent or obligation to publicly update
these "forward looking" statements, whether as a result of new information,
future events, or otherwise.
Revenues
Revenues for the three months ended March 31, 1999 were approximately $36,000 as
compared to approximately $45,000 for the same period in 1998. The revenue in
1999 was from the sale of two TransPeg systems and in 1998 was from sale of
pre-production boards and systems.
Cost of goods sold
Cost of goods sold was approximately $167,000 in the first three months of 1999
as compared to approximately $22,000 in the same period of 1998. The costs of
sales in 1998 consist principally of the material cost of the product shipped.
Cost of sales in the first quarter of 1999 contains not only the material cost
of the product shipped, but also expenses related to building and staffing a
production department in anticipation of product releases. The cost of sales as
a proportion of sales experienced in the periods shown in 1998 and 1999 do not
necessarily predict the cost of sales that the Company might experience at such
time, if any, that production level products begin to ship in normal production
volumes.
Research and development
Research and development expense was approximately $369,000 in the first quarter
of 1999 as compared to approximately $1,423,000 in the same period of 1998. The
reduction from 1998 to 1999 reflects the actions taken in June 1998 to terminate
chip development efforts, and to greatly reduce all expenses in research and
development. Essentially all categories of expense decreased between the first
quarter of 1998 and the same period in 1999, but the largest reductions were in
payroll (approximately $342,000), materials, supplies, and services
(approximately $366,000), and consulting (approximately $121,000).
Selling, general and administrative
Selling, general and administrative expenses decreased from approximately
$2,015,000 in the first three months of 1998 to approximately $607,000 for the
same period of 1999. This reduction reflects the cost reductions made by the
Company in June 1998. The largest single expense reduction was in consulting and
other costs to prepare for the National Association of Broadcasters show, which
were approximately $366,000 less in the first quarter of 1999 than in the same
period of 1998. The next most significant reduction was in legal expense, which
declined by approximately $300,000 from the first quarter of 1998 to the same
period of 1999. This reflects the success in reducing litigation costs borne by
the Company, and of the absence of merger and acquisition efforts in 1999, which
in comparison were very active in the first quarter of 1998. Essentially all
other cost items also decreased in the three months ended March 31, 1999 as
compared to the same period in 1998, consistent with the Company's directive to
reduce cost.
<PAGE>8
Interest expense, net of interest income
Interest expense net of interest income declined from approximately $976,000 in
the first three months of 1998 to approximately $659,000 for the same period in
1999. The difference between the two periods is due mostly to the amortization
of original discount on debt, which declined from approximately $777,000 in the
first quarter of 1998 to approximately $244,000 in the same period of 1999. This
was partially offset by penalties recognized in the first quarter of 1999 in the
amount of $195,000 under the Company's Debenture agreements for failure to
register the stock that underlies the convertible feature of the Debentures. No
such penalties were recognized in the first quarter of 1998.
Liquidity and Capital Resources
Through March 31, 1999, the Company funded its operations primarily through the
sale of stock and placement of debt. On March 31, 1999, the Company had a cash
balance of approximately $69,000 and a working capital deficit of approximately
$13,128,000. This compares with cash of approximately $34,000 and a working
capital deficit of approximately $11,851,000 at December 31, 1998. The increase
in working capital deficit is in close proportion to the loss experienced in the
quarter.
On January 15, 1999, the Company issued Convertible Debentures in the aggregate
principal amount of $750,000. The Debentures accrue interest at the rate of 7%
per annum and are convertible into shares of the Company's Common Stock at a
conversion price equal to the lesser of (i) 125% of the five-day average share
price at the time of issuance and (ii) 80% for conversions prior to 120 days
after issuance, 77.5% for conversions 120-150 days after issuance, and 75%
thereafter. The Debentures have a term of five years, expiring January 15, 2004,
and are secured by all of the assets of the Company. As part of the issuance of
the Debentures, the Company issued to the Debenture holders five-year warrants
to purchase up to 187,500 shares of Common Stock at $.50 per share.
In March, April, and May 1999, the Company borrowed an additional total of
$1,650,000 from the investor who had purchased the majority of the Debentures
evidenced in the form of three notes. The notes bear interest at 13% and are due
on demand. In conjunction with this funding, the Company issued the holder of
the notes five year warrants to purchase up to 1,000,000 shares of Common Stock
at $.60 per share.
In conjunction with the sale of the Debentures in January 1999 and of the three
notes in March, April, and May 1999, the Company issued warrants to purchase up
to 480,000 shares of the Company's common stock at prices ranging from $0.11 to
$0.84 per share to two investment brokers as finders' fees.
There can be no assurance that the Company will be successful in its efforts to
internally generate the cash that will be required to fund the Company's
operations and to pay off the liabilities incurred in prior periods. In
addition, if the Company's products are successful, the Company will require
additional capital to fund growth. In these events, the Company will require
additional funding to finance its operations. Since December 1997, the Company
has financed its operations through the issuance of convertible Debentures and
demand notes, but no assurance can be given that the Company will be able to
secure additional financing or, if it can, that it will be available on terms
favorable to the Company.
<PAGE>9
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's, or
its suppliers' and customers' computer programs that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in system failures or miscalculations causing
disruptions of operations including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
The Company's operations are now based on software applications that the Company
believes to be Year 2000 compliant. This included the recent purchase of Year
2000 compliant versions of software for its computer, security, and
communications systems, as necessary. The Company has not yet identified any
Year 2000 problem but will continue to monitor the issues. No assurances can be
given that the Year 2000 problem will not occur with respect to the Company's
computer systems.
The Company believes that its products are Year 2000 compliant. The Company has
initiated communications with significant suppliers to determine the extent to
which those third parties' failure to remedy Year 2000 issues in their own
operation or in their products might materially effect the Company's operations
or products. The Company has not received any indication from its suppliers that
the Year 2000 Issue may materially effect their ability to conduct business or
supply Year 2000 compliant products to the Company. In addition, the Company
continues to test its products and the third party software it purchases for
Year 2000 compliance.
Seasonality and Inflation
The Company does not believe that its business is seasonal or is impacted by
inflation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company has a number of overdue accounts payable to vendors. A number of
these vendors have filed suit against the Company to enforce collection. To date
the Company has been able to reach settlements on most of these collection
actions, but as of May 14, 1999, five of these collection actions seeking to
collect a total of approximately $95,000 were outstanding. There can be no
assurance that the suits that have been or will be filed, or the terms that
might be reached for settlement will not create material hardship to the Company
in the future. Management anticipates that the number of such suits might
increase over time as the Company's unpaid obligations age further if more
vendors conclude that legal action is the prudent course to pursue for
collection.
Item 2. Changes in Securities and Use of Proceeds. - Not Applicable
Item 3. Defaults Upon Senior Securities.
The Company was not in compliance with certain covenants under the terms of the
December 1997, June 1998, August 1998, and January 1999 Debenture and Warrant
transaction documents including, but not limited to: payment of interest,
maintenance of adequate authorized common stock reserve, timely registration of
<PAGE>10
common stock underlying debt conversion rights, common stock trading volume, and
timely filing of reports to the Securities Exchange Commission. Consequently
these debentures are classified as current debt in the Company's financial
statements.
Item 4. Submission of Matters to a Vote of Security Holders. - Not Applicable
Item 5. Other Information.
To provide for working capital since December 1997, the Company has issued an
aggregate face value of $9,750,000 of Convertible Debentures to two investor
funds that are affiliated with each other. On May 14, 1999, $9,540,000 of these
debentures remained outstanding. At May 14, 1999 the average price at which
these convertible debentures could be converted into the Company's Common Stock
was approximately $.32 per share. If these two investors had exercised their
conversion rights at that time they would have owned approximately 60% of the
outstanding Common Stock of the Company, giving them effective control of the
Company. Because the price at which most of these convertible debentures can be
converted into common stock is dependant on movements in the market price of the
Company's common stock, the actual percentage of control that these two funds
might acquire at any given time could be greater or less than the figure
determined as of May 14, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
<PAGE>11
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INNOVACOM, INC.
(Registrant)
Date: June __, 1999 /S/ FRANK J. ALIOTO
--------------------------------
Frank J. Alioto, President and
Chief Executive Officer
Date: June __, 1999 /S/ STANTON CREASEY
--------------------------------
Stanton Creasey, Chief Financial
Officer
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED BY THE 10-QSB
FOR THE PERIOD ENDED MARCH 31, 1999 FOR INNOVACOM, INC. AND IS QUALIFIED BY ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 69,000
<SECURITIES> 0
<RECEIVABLES> 52,000
<ALLOWANCES> 34,000
<INVENTORY> 136,000
<CURRENT-ASSETS> 314,000
<PP&E> 463,000
<DEPRECIATION> 192,000
<TOTAL-ASSETS> 622,000
<CURRENT-LIABILITIES> 13,442,000
<BONDS> 0
0
0
<COMMON> 25,000
<OTHER-SE> (12,845,000)
<TOTAL-LIABILITY-AND-EQUITY> 622,000
<SALES> 36,000
<TOTAL-REVENUES> 36,000
<CGS> 167,000
<TOTAL-COSTS> 1,143,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 659,000
<INCOME-PRETAX> (1,766,000)
<INCOME-TAX> 2,000
<INCOME-CONTINUING> (1,768,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 123,000
<CHANGES> 0
<NET-INCOME> (1,645,000)
<EPS-BASIC> (.07)
<EPS-DILUTED> (.07)
</TABLE>
